Jun 30, 2020 Thesis Validated, Micron Delivers Excellent Quarterly Earnings Dear Savio, Micron Corp. (MU) released an exceptional quarterly earnings result yesterday afternoon. The company reported revenue, profit margins, and earnings that topped analyst estimates. Additionally, the company boosted its outlook for the rest of the year. As most subscribers may remember, Micron issued a press release one month ago that increased its revenue and profit expectations for the quarter. As I reported at the time: Micron raised its expected revenue for the quarter from a range of $4.6-$5.2 billion to a new range of $5.2-$5.4 billion. In other words, the old top-end estimate became the new bottom-end estimate. And if we were to use the midpoints of these two forecasts, the company boosted its guidance by $400 million – from $4.9 billion to $5.3 billion. Even more impressively, the company revealed that it expects to drop more than half of this revenue boost down to the bottom line and increase non-GAAP earnings per share (EPS) by about $250 million more than it had forecast previously. The company’s prior guidance called for the current quarter’s EPS to come in around $0.55. The updated guidance anticipates a jump to at least $0.75.
Micron did not disappoint. Both revenues and adjusted earnings topped the high end of the revised range the company had provided. In other words, the company raised the bar… but cleared it anyway by reporting revenues of $5.43 billion and adjusted EPS of $0.82. These strong results validate the thesis I presented when I recommended the Micron Technology Inc. (MU) January 2022 $50 call options on March 16. “The coronavirus could help boost semiconductor demand,” I predicted. “Almost every commercial or recreational activity that eliminates or reduces human interaction relies on semiconductors.” To review, Micron specializes in DRAM and NAND memory chips. DRAM, or dynamic random-access memory, is the type of memory commonly used in PCs and servers, while
NAND chips are the flash memory chips used in USB drives and smaller devices,
like digital cameras and smartphones. Micron’s DRAM revenue jumped 16% from the previous quarter to $3.6 billion. That figure represents about two-thirds of the company’s total sales. NAND represents most of the rest. The company attributed the sharp jump in DRAM revenue to “rapid work-from-home infrastructure deployment, as well as increased 5G deployments, particularly in Asia.” The company also cited “strong demand due to the… e-learning economy and significant increases in e-commerce activity around the world.” NAND revenue increased 10% sequentially and was up over 50% year-over-year. Micron CEO Sumit Sadana made it very clear that the COVID-19 pandemic was boosting memory demand from various end users. Further, he made it clear that he expects this demand surge to continue, as both businesses and individuals adjust to the new normal that the coronavirus has introduced. While acknowledging the pandemic’s negative impact on demand from the auto sector and parts of the consumer sector, Sadana issued a very upbeat outlook: Market segments driven primarily by consumer demand have seen a negative impact. Calendar 2020 analyst estimates for end-unit sales of autos, smartphones, and PCs are meaningfully lower than pre-COVID-19 levels, even though estimates for enterprise laptops and Chromebooks have increased. The reduced level of global economic activity has also curtailed near-term demand. [However], the pandemic is driving rapid change in consumer and corporate practices around the world. Consumers are significantly increasing online activity, including e-commerce, gaming, and video streaming, all of which drive additional data center capacity requirements.
Looking ahead to the second half this year, Micron expects data center demand to remain healthy, while smartphone and consumer end-unit sales continue to improve. Lastly, the company mentioned new gaming consoles as a factor that will drive stronger DRAM and NAND demand. In the mobile sector, Micron expects a meaningful boost in demand from the global 5G rollout. Not only will consumers be swapping out their old smartphones for the new 5G versions, but the new phones will also pack a lot more computing firepower than the old phones. For example, 5G phones have 6 gigabytes (GB) of DRAM and 64-128GB of NAND, versus 4G phones with 2-4GB of DRAM and 32-64GB of NAND. Looking longer term, Sadana remarked: Emerging technologies such as drone-based deliveries and the increased use of robotics across many applications are now being pursued with urgency. Technology solutions are rapidly helping society adapt and manage the temporary and permanent changes stemming from this pandemic. Clearly, certain trends that would have taken 2 to 4 years to develop have been accelerated into months. It is easy to see how these changes will drive higher consumption of memory and storage in the long term. The faster pace of digital transformation in the economy is here to stay.
No wonder optimism reigns at Micron HQ. Perhaps that’s why the company has been buying its own stock. The company spent $40 million during the quarter to buy 929,000 shares at an average price of $43.54. Despite this outlay, the company continues to generate robust cash flow and build its cash levels. The company ended the quarter with $2.6 billion in net cash, up from $2 billion at the end of last quarter. Sadana again: Our strong competitive position and diversified product portfolio put Micron in an outstanding position for the many exciting growth opportunities in the memory and storage markets… As the only company with a portfolio of DRAM, NAND, and 3D XPoint technologies, Micron is uniquely positioned to benefit from the secular data growth that is driving the cloud, enterprise, and networking markets.
For the current quarter, the company expects revenue to be $6 billion, plus or minus $250 million, and expects EPS to be $1.05, plus or minus $0.10. If Micron hits that EPS target, it would have achieved a doubling of its earnings year-over-year. But Micron’s outlook is not all rainbows and unicorns. Earlier today, the Federal Communications Commission designated Huawei Technologies Co. and ZTE Corp. as national security threats. The press release from FCC Chairman Ajit Pai states starkly: Based on the overwhelming weight of evidence, the Bureau has designated Huawei and ZTE as national security risks to America’s communications networks — and to our 5G future. The Commission proposed that Huawei and ZTE be covered by this rule because of their substantial ties to the Chinese government, Chinese law requiring them to assist in espionage activities, known cybersecurity risks and vulnerabilities in their equipment, and ongoing Congressional and Executive Branch concern about this equipment.
The action means many small rural carriers in the United States will no longer be able to tap federal subsidies to buy or maintain equipment produced by Huawei or ZTE. Inconveniently, Huawei accounts for 13% of Micron’s revenues. Clearly, those sales are at risk. Although today’s directive from the FCC does not directly affect sales to Huawei, it does take a step down that road. Losing its sales to Huawei would be painful for Micron, but from a glass-87%-full perspective, Micron could probably overcome this 13% revenue loss in short order. What’s more, the “Huawei cloud” has been hanging over Micron for more than a year. That’s probably a big part of the reason why the stock has been trading at a discounted valuation, relative to most other stocks in the sector. Nevertheless, the Huawei risk seems to embolden the few skeptical Wall Street analysts who are still hanging around. Despite Micron’s outstanding earnings report, for example, Nomura Instinet’s David Wong reiterated his “Neutral” rating on the stock and placed a $51 12-month price target on it. In other words, he expects the stock to go nowhere. At the other end of the analyst spectrum we find Credit Suisse’s John Pitzer, who rates the stock “Outperform” and sets a $90 price target on it. As a group, 26 of the 34 analysts who cover the stock rate it a “Buy” and are predicting very strong earnings growth over the next couple of years. For 2021, the consensus calls for $4.70 a share in earnings, with that jumping to about $5.70 the following year. If the company achieves those numbers, it would be selling for just 11 times next year’s earnings and nine times 2022 earnings. But I expect Micron to continue beating consensus estimates over the next several quarters, thanks both to resurgent demand from the mobile sector and to Micron’s next-generation chips that should fatten the company’s profit margins. Keep hanging on to those Micron Technology Inc. (MU) January 2022 $50 call options for additional gains. They are now selling for $12.50 and are up 78% in the Speculator portfolio. Regards, 
Eric Fry
The Speculator
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